Islamic Financing

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Islamic financing has become a significant component of Abu Dhabi's banking and investment sector, increasing its market share and encouraging more financial institutions to offer Islamic products.

Amr Hussain Dabbous, the head of market strategy and research at Makaseb Islamic Financial Services, told OBG he believes that the impressive growth in the Islamic finance sector will continue over the coming years. He said, "Currently, conventional banking holds the majority share of the market. However, in the next five years I believe we will see a reversal of this trend." He added, "Islamic financial services could capture as much as 70% of the retail investor and banking market."

Although projections vary, most analysts concede that the conventional banking sector will forfeit a substantial percentage of Muslim retail banking business to Islamic financing options. A widely agreed figure is 30-40% in the medium to long term.

It is clear that the sector is growing at an impressive rate. In the four year period from 2001, Islamic retail deposits increased by approximately 29% per annum in the UAE which was almost double the aggregate retail deposit growth over the period. The Islamic retail credit market also expanded from 9 to 11% during this same period. According to Prime Research, the sector will maintain its strong performance with forecast annual growth of 29% for Islamic retail deposits and 16% for Islamic retail credit through to 2008.

These figures are reflected in an increasing demand regionally for Islamic financial products. By the end of 2004, Islamic banking assets reached $55bn in Gulf Cooperation Council (GCC) countries compared to global assets of approximately $300bn. Dabbous believes, however, that the UAE can be a leader in the region for Islamic financial services driving further growth.

In the first half of 2006, the Islamic banks in the UAE largely outperformed their conventional counterparts in terms of growth. The profits of the four Islamic banks operating in the UAE rose by 62% to Dh1.13bn ($307.66m) from Dh709.3m ($193.11m) for the same period in 2005. Abu Dhabi Islamic Bank performed particularly well with profits touching Dh291.7m ($79.42m), an increase of 106% on last year. It also recorded a 62% growth in assets with the figure standing at Dh29.6bn ($8.06bn) at the end of June.

Such healthy figures have encouraged many banks and financial institutions to pour more energy into their Islamic products as they seek to capture a slice of the growing market in Abu Dhabi. Deutsche Bank's recent agreement with Abu Dhabi-based Islamic finance company Amanah Capital is indicative of this. Under the agreement the two companies are working together to produce the Al Hosin fund, a new type of investment vehicle that protects investors' returns. The Sharia compliant investment fund will offer an 80% profit lock-in whereby 80% of the highest value of the fund is protected. It will also offer weekly entry and exit options. This product will provide stable returns for the investor at a time when investor sentiment is still bruised by the market correction earlier this year.

Many other local, regional and international banks are also stepping up their presence in the Islamic finance market in an attempt to maximise the potential size of their customer base.

The local Union National Bank (UNB) is in the process of setting up an independently run Islamic finance subsidiary called Al Wifaq Finance Company. The company will have capital of Dh500m, 80% of which will be held by UNB with 20% being held by strategic investors. Al Wifaq will offer a full range of Sharia compliant products including Islamic trade finance and Islamic credit cards. The company is in the final stages of being licensed by the Central Bank.

Other banks are focusing on creating exclusive Islamic windows rather than establishing dedicated subsidiaries. International banks such as Standard Chartered are keen to attract further retail and corporate customers through Islamic financial tools while HSBC has already established a strong presence in the market through its global Islamic financing arm HSBC Amanah. This has been offered at a consumer level in Abu Dhabi for two years.

Islamic financial services are also attempting to increase their share of the project finance market. Perhaps the most high profile move in this direction is the part financing of the Dolphin Project through Islamic financial instruments. Fourteen financial institutions provided the cross border gas project between Qatar and Abu Dhabi with one billion dollars in financing in 2005. The Islamic financial arrangement was the first of its kind and was led by five banks with Sharia supervisory committees, namely ABN Amro Bank, BNP Paribas, Citigroup, Dubai Islamic Bank, and Gulf International Bank.

Speaking for the lead banks, Aref Kooheji, the executive vice president and head of corporate and investment banking for Dubai Islamic Bank, told local reporters, "The one billion dollar Islamic financing facility for Dolphin is by far the largest Sharia compliant oil and gas financing transaction to date. More important than mere size, though, are the innovations achieved in this transaction, and the role they will play in the development of Sharia compliant financing in the future. The lead banks believe that the Dolphin transaction sets valuable precedents that will serve as benchmarks for Islamic structured project financings for years to come."

With such high profile projects being financed by local and international banks through Islamic products, the increasing importance of the Islamic financial services sector cannot be underestimated. As the demand for Islamic products continues to grow at both the retail and corporate level, banks are being alerted to the potential of this under-tapped market.

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